4 mortgage messes to avoid

Buying a home can be a tricky task, particularly for first-time buyers. A typical mortgage agreement can be a minefield of potentially problematic clauses. Before you draft a document and sign on the dotted line, here are five mortgage mistakes to avoid.

Pre-Payment Penalty

Thirty years is a long time to carry around a mortgage, so many homeowners will make extra payments when they have a little extra cash in order to speed up the process. But lenders make their money off the interest you pay, so the longer the mortgage, the more they stand to gain. As a result, an increasing number of mortgages come with early payment penalties — the lender will charge you extra if you make a lump-sum payment ahead of schedule. While you might think you’ll never have the cash to make a large lump-sum payment, there are still good reasons to avoid one of these types of loans. If you ever sell your home or refinance, you’ll effectively be paying off the loan early, and you’ll likely get dinged with high fees. To maximize your flexibility when paying off your mortgage, make sure you loan agreement is free and clear of these sorts of penalties.

Fixing It Up

Sometimes a home seems perfect, but the building inspector gives it a failing grade in a few key areas. Maybe the roof needs to be repaired, or the water heater needs to be replaced — things that can be can be fixed, but aren’t necessarily deal breakers. To sweeten a deal on a fixer-upper, many buyers will ask for repairs be made before the move-in date. However, this sort of deal can be problematic. An exiting owner has little incentive to do the job right, and you might spend the first few months in your new home chasing down contractors to redo the work. Rather than rely on the current owners to make the changes, you might be better off asking for a price reduction and making the repairs yourself.

Underestimating Monthly Payments

When figuring out if they can own a new home, many potential buyers do a quick back-of-the-envelope calculation to come up with their monthly payments and downpayment. Unfortunately, the mortgage only makes up a portion of your monthly payment, and many buyers — particularly those new to homeownership — forget to factor all the added fees into their monthly payments. Closing costs, such as attorney fees, home inspections and lender fees — can add 5 percent to the cost of the home. Most state and local government levy property taxes, which can add a few thousand dollars a year to the cost of owning a home. Add in the cost of monthly homeowners insurance and repairs and the monthly cost can be considerably higher than anticipated. So before getting too far along in the buying process, sit down with a financial planner to see what you can really afford.

Exotic Mortgages

During the housing bubble, lenders created increasingly complicated mortgage products as they looked to sell homes to more and more people. However, many of these mortgages proved to be extremely risky, leaving homeowners on the hook for loan payments they couldn’t afford. The purpose of these loans is to make it seem like a house is affordable today by luring people with the promise of zero down or a low initial interest rate that shoots up after a few years.

If you’re looking for a house with a low downpayment, mortgages backed by the Federal Housing Administration are usually your best bet, which allow you to land a home with a downpayment as low as 3.5 percent. And unless you plan on moving in less than five years, a fixed rate mortgage will almost always get you the best deal in the long run. So you’re better off skipping those loans that seem to promise the perfect dream home with little upfront costs.